Tag Archives: Investing

Financial Literacy: Saving for Retirement

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“We teach our kids everything in high school: sex education, geography, math, reading, etc. We do not teach them anything about credit cards, or debt, or investing. Then we ask ourselves why we end up in a situation as we are today, which has been highlighted by the pandemic a bit: There’s 100 million people in America that have set nothing aside for their retirement.” Kevin O’Leary

The retirement crisis in America is an ongoing worry for most Americans. As companies have shifted away from offering traditional (defined) pension plans to employees, much of the responsibility in planning for financial life after work now relies heavily on individuals. Unfortunately, the crisis is mostly due to a lack of financial literacy and consumer spending on new shiny things, and as a result, most are struggling to keep up.

A March 2019 Bankrate survey found that more than 1 in 5 working Americans aren’t saving any money for retirement, emergencies or other financial goals. Major barriers as to why respondents said they weren’t saving included not making enough money, financially helping adult children, and large credit card and other personal debt payments.

Financial assistance to adult children

Parents are helping their adult children financially and the majority of those parents say that financially supporting their adult children is hurting their savings for retirement and their financial futures, according to Bankrate. In total, 50 percent of respondents to a Bankrate survey say they have sacrificed or are sacrificing their own retirement savings in order to help their adult children financially.

Living and remaining in the workforce longer

American baby boomers are healthier and are living longer; as a result, they’ll need a bigger nest egg to fund their retirements, especially since the number of employers providing pensions has been steadily shrinking. As some reach retirement age and realize they don’t have enough saved, it’s keeping them in the workforce longer. Workers older than 55 years young filled almost half of all new jobs in 2018 even though they make up less than a quarter of the nation’s labor force, according to an analysis of Labor Department data by The Liscio Report.

“Many seniors are having a hard time making ends meet and find they have to work when they had not planned to.” Dean Baker, cofounder of the Center for Economic and Policy Research.

“Most Americans haven’t made saving [for retirement] a priority”, says Nick Holeman, CFP at Betterment. “Most people don’t like to admit that, but we live in a consumer culture and it can be difficult to turn down the new shiny gadgets.” Saving for retirement is your largest and most important financial goal. Even if it feels very far away, it’s important to start saving early.

Holeman recommends that Americans wanting to retire to take three steps:

  1. Create financial goals and a financial plan. At a minimum, you should have these two financial goals: Create an emergency fund and save for retirement. SoFi calls these “bookend goals”—your primary short-term and primary long-term goal. Your financial plan should consist of small, achievable goals; they’ll help you see your finish line and empower you to stay on track. Start by determining how much you need to retire comfortably.
  2. Come up with a strategy to execute. Selecting an investment strategy depends on your financial goal amount (how much you want to save each month or year) and the time horizon (when you’d like to use that money). Decide how you plan to save that amount.
  3. Get creative. For those struggling to save, consider retiring later or working part-time during retirement. Holeman says there are tons of other options out there, which he refers to as “levers,” like moving to a low-cost state or downsizing your home. Engaging them can help get your retirement savings back on track.

Investing

It has been regularly reported that billionaire investor Warren Buffett made 99% of his current wealth after his 50th birthday.  At an age when most Americans give up hope achieving financial independence, Buffett was just getting started on the capital assets he controls today.  Building wealth could mean financial peace, taking a spur-of-the-moment international travel.

Many older Americans are advised to sell or significantly reduce their stock holdings and frankly, this advice is antiquated, shortsighted and wrong.  Buffett built his incredible level of wealth by continuing to buy stocks despite his advanced age.

References:

  1. https://www.bankrate.com/personal-finance/financial-independence-survey-april-2019/
  2. https://www.bankrate.com/retirement/baby-boomers-unable-to-retire-gig-economy/
  3. https://www.usatoday.com/story/life/allthemoms/2019/04/24/adult-children-robbing-parents-retirement-savings-study-finds/3559812002/
  4. https://d32ijn7u0aqfv4.cloudfront.net/wp/wp-content/uploads/20170718165706/Guide-to-Investing-Intelligently_V5-1.pdf

Habits for a more Abundant Life

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Two most important:

  • Read at least thirty minutes everyday
  • Know and pursue a goal your passionate about

Intelligence, talent and charm are great, but more often than not these aren’t what separate the wealthiest among us from the poorest.

Instead, the differences are in our daily habits.

Do you realize that these subconscious, second-nature activities make up 40 percent of our waking hours? That means that two out of every five minutes, all day and every day, we operate on autopilot.

It’s true: Habits are neural pathways stored in the basal ganglia, a golf ball-size mass of tissue right in the center of our brains, in the limbic system.

This neural fast lane is meant to save the brain energy: When a habit is formed and stored in this region, the parts of the brain involved in deeper decision-making cease to fully participate in the activity. However, we all know there are good habits and bad habits.

5 habits

We know that habits can either help or hurt your success in life. Bad habits can fester and grow into a lifestyle that takes you away from the things you want to do—and good habits can help you create a life that’s full of action and accomplishment.

If you were to look at someone you respect, someone who’s successful, you would see that they spend each day doing the things that help them accomplish their biggest goals. This isn’t to say they’re perfect—because no one is—but despite the things that are not perfect in their lives, they continue to make moves that have a positive impact. And it starts with their daily habits.

Now, while we can all study successful habits, it’s meaningless if we don’t implement that knowledge. So, according to Kimanzi Constable, here are five daily habits you can adopt to create the life you truly want to live:

1. Plan out your day the night before.

It’s easy to get off track when you don’t have a plan. Without planning what your day will look like, you wake up not knowing what you want to do or accomplish. Spend a little time the night before giving yourself clear goals for the next day. Life rarely works out as planned, but with a plan, you can adjust without losing momentum.

2. Read books and novels to get inspired.

Reading is an essential element in success—books contain so much knowledge. Forming a daily reading habit will expand your knowledge, allow you to learn more about your profession and help you on your journey to success.

3. Make your health and fitness a priority.

What you eat and how much you exercise affects every area of your life. Successful people use their exercise as a time to reset and reinvigorate. And they make smart food choices that will give them the energy they need to accomplish everything on their daily to-do list.

4. Don’t get distracted by what other people are doing.

Other people’s journeys to success can be inspiring; you can learn so much—about their mistakes, their victories, what to do, what not to do. But if you start comparing your progress to theirs, instead of using their stories as inspiration, you can lose focus and fail to keep your eyes on your own mountain top. Realize your journey is unique and can’t be compared. So don’t get stuck in the comparison trap—stay focused on your why.

5. Live each day as if it were the last.

Life is busy, it’s chaotic, and so you tend to want to focus on the future—we all do it, worry about what’s next. But while planning is important, so is living—being fully present.

Life is short, and there’s no guarantee as to when it will end. Successful people live each day as if it were their last and make the most out of each moment—and so should you.

When you look at a big goal, it’s common to get frustrated at the enormity of what you’re trying to accomplish. If you wake up each day determined to spend it forming good habits, you give yourself a better chance at success. So use these five habits as a starting place to build whatever a successful life means to you.

Read more:

  1. https://www.success.com/16-rich-habits/
  2. https://www.moneycrashers.com/productive-habits-wealthy-successful-people/

Dividends are Important in Retirement

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“Get paid to wait” Kevin O’Leary

Noted Shark Tank investor, Kevin O’Leary aka “Mr. Wonderful”, has one simple rule when it comes to investing in a stock. If it doesn’t pay a dividend, he does not consider the stock. His investment mantra is “get paid to wait”.

“My whole investment strategy is built around cash flow”, O’Leary said. “I have a little Charlie Munger on my shoulder every day when I look at a deal, and he’s just saying two words: ‘cash flow, cash flow.'”

Know your cash flow.

How much do you make after taxes? How much do you spend. Investors in retirement must figure out how to generate cash flow without a job from multiple income streams to meet essential living expenses and spending while also making sure they don’t outlive their income stream.

Receiving regular dividends, or “getting paid to wait” reduces an investor’s dependence on the market’s volatility and the roller coaster like price swings by stocks to make ends meet.

Essentially, dividends could become investors “cash flow” in retirement. Naturally, then, the best retirement stocks to buy in 2021 (or any other year) to accomplish those objectives are ones that pay dividends.

Regular dividends lessen an investor’s dependence on the market’s fickle price swings because it reduces or eliminates the need to sell shares to generate income. Regardless of whether the market rises or falls in 2021, a portfolio of high-quality companies can provide you with predictable, growing dividend income.

And in today’s low-interest-rate environment, dividend stocks can generate much higher income than many fixed-income instruments. Better still, many dividend-paying stocks grow their payouts, which preserves those dividends’ purchasing power. And dividend stocks, like other equities, also provide meaningful long-term price appreciation potential.

Whether or not the market rises or falls, a portfolio of quality businesses delivering predictable, growing dividend income is always preferred.

Dividend stocks, like other equities, can provide long-term price appreciation. Dividends are the periodic payouts investors can earn by investing. And because many companies pay a dividend — more than 80% of the S&P 500 stocks currently pay dividends, according to data from FactSet — investors can actually earn money even when the market is down.

Research firm Simply Safe Dividends published an in-depth guide about living on dividends in retirement here. However, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time.

What are Dividend Stocks

When investors buy stocks, they can make money two different ways. The first is by selling their shares for a price that’s higher than their original cost. The second is by collecting dividends. Dividend stocks are companies that pay shareholders a portion of earnings, as dividend, on a regular basis. Not all stocks pay dividends, but those that do offer shareholders a steady stream of income.

These payments are funded by profits and cash flow that a company generates but doesn’t need to retain to reinvest in the business. Shareholders can receive dividends as cash or additional shares of stock. As an investment category, dividend stocks also have an impressive track record of helping people build wealth over the long term.

To live on dividends in retirement, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time. Look for companies with a history of paying and increasing dividends, as well as sufficient earnings and cash flow from current operations.

Dividend Aristocrats

Dividend Aristocrats are a select group of S&P 500 Index stocks with a history of 25+ years of consecutive dividend increases. These businesses have both the desire and ability to pay shareholders rising dividends year-after-year. They are considered the ‘best of the best’ dividend growth stocks.

The Dividend Aristocrats have a long history of outperforming the market. The requirements to be a Dividend Aristocrat are that they’re in the S&P 500, have 25+ consecutive years of dividend increase, and must meet certain minimum market cap and liquidity requirements.

Dividend Yield

Dividend yield refers to a stock’s annual dividend payments to shareholders expressed as a percentage of the stock’s current market price. A stock’s dividend yield can and frequently does change over time, either in response to market fluctuations or as a result of dividend increases or decreases by the issuing company. And, it’s important to keep in mind that a high dividend yield alone doesn’t make a stock a great investment.

Dividend amounts and yield might seem small in mid-2019. The average dividend payment for U.S. stocks was 1.87% of your investment, according to Siblis Research. Regardless the size of the ratio, they can drastically impact an investor’s long-term investment performance and retirement income.

GE’s Dividend Story

General Electric (GE) has been one of America’s most widely held stocks, and countless retirees relied on the dividend payments. But, the company was under enormous balance sheet and cash flow pressure, and it became necessary to cut the dividend in half. By cutting, GE saved significant cash flow making it one of the largest dividend cuts in the history of the S&P 500 and the biggest for GE since 2009, according to S&P Dow Jones Indices.

But dividend cuts had been rare at the time since many companies were increasing them because the U.S. economy was healthy and the stock market was booming. GE’s dividend had been reliably paid for multiple decades.

Prior to GE Board’s decision to cut its dividend, GE was having problems and could not earn enough money to cover its dividend payments. Free cash flow, which measures how much cash is being generated after investing in the business, had deteriorated for six straight years.

Dividends: Cash Flow is King during Retirement

The distinction between income and cash flow is important during retirement. Generating income in retirement is focused on finding investments that pay a high yield, which necessarily means taking on more risk. Focusing instead on cash flow allows investors to take a broader perspective, assessing various aspects of their finances to determine how to creatively produce the money required for expenses. Cash flow strategies may allow retirees to reach their financial goals while not necessarily taking on a higher level of risk.

A primary financial goal in retirement is to guarantee a minimum daily standard of living so you don’t outlive your nest egg and can sleep well at night.  Some folks are able to meet that minimum income amount they need through some combination of pension income, Social Security payments, and guaranteed interest from certificates of deposit. 

 “I have found that retirement is all about cash flow, not net worth, especially after the real estate crash. I have met people who have a net worth of $2 million, which looks great on paper, but when it comes to retirement income, they are just barely squeaking by on their Social Security and a small pension. It’s great that you are worth $2 million, but ultimately, it’s your cash flow that will determine your quality of life in retirement, not your net worth.” Jason R. Parker, Sound Retirement Planning: A Retirement Plan Designed to Achieve Clarity, Confidence & Freedom

When picking dividend stocks, chasing yield can cause issues where the price has declined, which may be an opportunity for capital appreciation, but may create greater risk for income seekers since the stock may be cheap for a legitimate idiosyncratic reason.

It’s important for investors to find a company they feel comfortable with, and whose product line they understand. Next, they can look at the company’s ability to generate sufficient earnings and cash flow to pay their annual dividends, operate their business, and have enough left over to grow, remembering that not all quarters must indicate growth.

An investor’s particular situation must be considered such as their required income needs during retirement, weighed against their desire for capital growth— typically, lower-growth segments, such as utilities, pay more yield. Investors who allocate upwards of 80-100% of their portfolio to dividend-paying stocks to generate more income and achieve stronger long-term capital appreciation potential and income growth, are incurring greater risks.

Additionally, their specific risk/reward trade-off (and there is risk in all stocks), keeping in mind their ability to ride out a downturn without having to sell the stock on the way down.

References:

  1. https://markets.businessinsider.com/news/stocks/shark-tank-star-kevin-oleary-investing-yahoo-short-retail-pandemic-2021-1-1029932948
  2. https://www.kiplinger.com/investing/stocks/dividend-stocks/602016/21-best-retirement-stocks-income-rich-2021
  3. https://www.simplysafedividends.com/intelligent-income/posts/1-living-off-dividends-in-retirement
  4. https://www.forbes.com/sites/jonathanshenkman/2020/10/21/7-strategies-to-generate-sufficient-cash-flow-in-retirement/?sh=2fe4062b2ac4#click=https://t.co/qv3DensgA1
  5. https://www.spindices.com/documents/education/indexology-december-2017-can-dividends-yield-a-better-retirement.pdf?force_download=true
  6. https://www.fool.com/knowledge-center/dividend.aspx
  7. https://www.fool.com/investing/your-definitive-dividend-investing-guide.aspx

Purpose Driven Saving, Investing and Accumulating Wealth

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Investing with a Purpose – “Start with the Why” regarding saving, investing and accumulating wealth.  It’s about your values and life goals.  It’s about keeping your eyes on the prize and on the why you’re saving, investing and accumulating wealth.

There is an underlying reason why you invest your hard-earned money and it’s not just to earn more money.  While that may be the ultimate outcome, the “Why” or “Purpose” of investing is something completely different.  Simply put, you invest to achieve your financial goals in life. These goals are different for every person.  Maybe it’s retirement, a child’s college education, buying a beach house, or planning for the next generation. We all have our own goals, whatever they may be.  It’s your mission to plan out a clear path to achieve those goals. This is what is considered Investing with Purpose.

Purpose-driven investing thrives by instilling a sense of purpose into any investment.  People seek to achieve real-life objectives such as saving for your kid’s college or your retirement.

A firm purpose behind your saving for the future, investing for the long term and accumulating wealth will ensure that you are making the right money management decisions today to achieve long term financial success. Your risk will be optimized when your purpose for saving, investing and accumulating wealth matches your goals and timeline.

People Invest to Achieve Personal Financial Goals

“An investor without investment goals, objectives and a plan is like a traveler without a destination.” Anonymous

Understanding your values and what you want to accomplish in life is essential to “Purpose Driven” saving, Investing and accumulating wealth.  Saving, investing and accumulating wealth are deeply personal undertakings, which is why you must always start with a discussion about what’s really important to you. This helps us shape your saving, investing and accumulating wealth strategy around three key dimensions of your financial life: liquidity, longevity and legacy.

When people are asked why they invest, their answers typically are focused on family and future goals in life—buying a house, saving for emergencies, retirement, taking care of loved ones. Those are the big picture answers. But as in life, it’s often as much about the journey as the destination. Investors have specific expectations about the investment experience, as well as the outcomes.

For example, some investors want long-term growth to build their retirement nest egg, but they don’t want to feel the volatility that can occur in the broader stock market. Others want regular income distributions after they reach retirement. Still others want investments that can help them manage through changes in the economic environment, or more personal economic challenges.

Create the future you want for yourself and your loved ones. New to investing or an experienced trader. To be great and successful at any endeavor, you’ve got to sacrifice and put in the work, because anything easy is just average. To become great you have to make big sacrifices and work really hard — much above average.

Wise spending is a subset of wise investing. And, it’s never too late to start investing.

When you invest in assets over the long term, you are buying a day in the present that you don’t have to work several days in the future.

I like this quote since it succinctly defines one of the primary reason for investing … “putting away money today so sometime in the future, you do not have to work to live”. And the seeds you sow today, will reap the financial harvest to live a life in retirement with dignity and financial security.

Your actions dictate the consequences. Reaps what they sow, they suffer or benefit as a result of their own actions.

Investments are the tools we use to make your financial plan successful.  With your plan as the guide, your stock portfolio should be designed around your personal situation, needs, and goals.

6 simple ways to take action in your financial life without hurting your long-term goals | Vanguard

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“It’s natural and human to feel like you need to take action and “do” something–anything–to stay in control and protect your financial interests.”

Scientific studies have shown that the human brain really likes to feel in control. We’re built to take action to protect ourselves and the people we love when signs point to trouble.

That’s why when markets become volatile, it’s natural and human to feel like you need to take action and “do” something–anything–to stay in control and protect your financial interests. You might feel anxious or worried. Don’t worry; you’re not alone in feeling that way.

Taking action during uncertain times may help you feel more confident about the way things will turn out. That said, if you feel like you need to make changes to your portfolio, it’s important to make sure that the action you take won’t put your long-term financial goals in jeopardy.

Here are some things you can do to feel in control without losing sight of the bigger picture:

Run some numbers

If you feel you have to do something, consider starting with your calculator. Numbers can give you a rational way of framing things that can settle some of those anxious feelings. For example, you can analyze how market conditions have affected your portfolio and compare it with the expectations you had based on your risk tolerance. Or compare your current asset mix with your target and rebalance if it differs by 5 percentage points or more.

Speak the language of action

Describing your strategy as “staying the course” or “doing nothing” may make you feel you’re not doing enough. Instead, describe what you’re doing as fighting the impulse to get out of the market or giving your portfolio an opportunity to rebound. You’re trusting your mix of assets to get you through market ups and downs, and that takes mental strength. Give yourself credit where it’s due.

Talk it over

Consider sharing your plan of action with others. Take a look at the Vanguard Blog for inspiration. When other people show support for what you’re doing and chime in that they’re doing it too, it can make you feel good about your choices. Helping others when they have questions can also go a long way toward building your confidence.

Take comfort in history

So far, every market downturn in history has been followed by a rebound. We don’t know when it will happen or how big it will be, but there’s good reason to believe that better times are ahead.

Think about what you can control

If you’re saving for retirement, you may be able to control how much you save or how long you can save (if you have a retirement date in mind). If you’re retired, you may be able to adjust the percentage of your portfolio you withdraw during a market downturn.

Your spending habits are within your control too. Of course, it’s probably not realistic to expect that you’ll start clipping coupons, switch to generic brands, and skip your afternoon coffee run all at once. Try cutting down your spending in just one area at a time to see what works best for your life.

We recognize that this is your portfolio, and you control your asset mix. We don’t recommend changing your asset mix in response to market movement, but if you’re determined to make a change to your portfolio, make it a small one. Some examples of small things you can do: Direct one of your stock funds’ investment earnings to a bond fund, or change the asset mix of a single account rather than your entire portfolio.

Lean in

Lean on personal financial advisors to provide you with the leadership you need to make it through uncertain times. Trusting a financial expert to bring order to a situation that feels out of control can help you ease anxious feelings.

Source: https://investornews.vanguard/6-simple-ways-to-take-action-in-your-financial-life-without-hurting-your-long-term-goals/?cmpgn=BR:OSM:OSMFB:OTHERS:072920:TXL:OTM:xx::OTHR:OTH:OTS:XXX::XX&sf235757186=1

Note: All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Financial Planning and Market Volatility

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“The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism.”  Sir John Templeton

Market volatility is a fundamental part of trading and investing. When market volatility strikes, it’s common for investors to succumb to temptation and follow the herd to panic sell stocks.

Financial Planning is About Long-Term Goals

“All financial success comes from acting on a plan. A lot of financial failures come from reacting to the market.” Nick Murray

Setting financial goals—and sticking with your plan—is key to potential long-term success. Rather than letting market volatility change your long-term financial plans, it is important to stay focused on your long term goals and disciplined in your investment philosophy.

“Your financial goals aren’t set in stone,” according to Mark Gleason, senior manager of investment products and guidance at TD Ameritrade. “Circumstances change, and what you want might change. When that happens, it does make sense to change your approach.”

“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Peter Lynch

Just remember, the time to make adjustments to your long term financial plan are due to changes in life circumstances and should not be in response to market volatility. Here are four reasons to adjust your financial plan:

  1. Change in risk tolerance. If something has happened to change your risk tolerance, making tweaks to your financial plan can make sense. When a recent shakeup forces you to confront where you stand, it might be time to adjust your approach.
  2. New life events. Perhaps there’s been a death in the family. Or you’ve added a new baby to the mix. Maybe you’re getting married or going through a divorce. All of these life events can indicate a change in your financial planning approach.
  3. Shifting to a new life phase. Sometimes your approach needs to change as you actually start approaching your long-term financial goals. When you move from preretirement to actual retirement, your strategy is likely to change. Likewise, if you’ve been growing your child’s 529 and you’re worried about potential market volatility, you might make a few tweaks to the portfolio.
  4. Setting new financial goals. Most people set different financial goals as they move through life. Maybe you decide that buying a home isn’t the goal now; you’d rather get an RV and travel. Perhaps your target retirement age has changed. Whatever the new goal, you might need different financial planning in order to meet it.

Stay disciplined when investing.

Market volatility can cause discomfort, but it is important to realize that market volatility is short term and should not impact your long term goals and financial planning. You’ve set long-term financial goals designed to help you reach certain life milestones—and you don’t want to undo all your progress just to feel better during a market downturn.

“Why is staying the course so important?  As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Vanguard’s analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.” (Source:  Vanguard, https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/)

Reference:

  1. https://tickertape.tdameritrade.com/investing/financial-planning-setting-financial-goals-amid-market-volatility-18160
  2. https://www.livewiremarkets.com/wires/ten-quotes-on-volatility-from-the-masters-of-the-market
  3. https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/

Creating a Comprehensive Financial Life Plan

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A Financial Life Plan can help you get on the path to financial freedom.

A comprehensive life financial plan provides a picture of your current finances, financial goals and any strategies you’ve set to achieve those goals. The plan should include details of your cash flow, savings, debt, investments, and other elements of your financial life.

Creating a life financial plan can help bring things into focus—it’s like a roadmap to help you figure out how to reach your financial goals. a clear picture of what you want to accomplish, but the details of how to make it happen.

Financial planning involves identifying financial goals you want to achieve and making sure you have the “what-ifs” covered. This can help guide you through key decisions in life and make you less vulnerable to setbacks and financial hardships down the line. You can feel more confident about financial decision-making when you have a comprehensive plan to guide you. Your financial plan might cover a number of areas, from managing debt and saving for the future to building wealth and protecting your money.

Financial Life Planning connects our financial realities with our values and the lives we dream to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life’s financial, health and emotional goals.

It is a financial planning and investing approach which helps people align their investment portfolio with their values and with the things which are important to them. Think of it like a holistic roadmap for your financial well-being.

Financial life plan focuses on the emotional side of financial planning. It considers people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, behaviors, goals and resources.

“The right plan, executed faithfully, can be the difference between success and failure in any endeavor.” Brett N. Steenbarger, Ph.D., author of The Psychology of Trading

Whether you need to reduce spending and eliminate debt, increase your savings, or just refine the details, once you understand your financial mindset and associated behaviors; once you know where you are and where you need to go financially—a financial life plan can provide a more coherent sense of direction.

Market downturns and investment risk management

During periods of high market volatility and declines, financial life planning, when done correctly, assumes there will be these periods of volatility, panic selling and downturns like the equity markets are experiencing today as a result of COVID-19 pandemic. Any actions taken to significantly reduce or eliminate equity allocation could result in investors coming up short in retirement.

The risk of outliving their assets might be the biggest risk that retirees face today. With many of Americans living longer and the rising costs of healthcare in retirement, most retirees need a level of exposure to stocks in their portfolio for growth and to maintain their standard of living.

Steps to creating a Comprehensive Financial Life Plan

  1. Develop a Positive Financial Mindset
    The most important step in developing and following a financial life plan is to examine your mindset about money.
    – Are you ready to accept responsibility for changing your financial situation?
    – Do you believe that you can and will change the way you make financial decisions?
    – Can you identify at least one benefit you hope to gain by changing your financial behavior?
    Financial mindset consists of a predetermined set of beliefs, thoughts, habits and behaviors an individual has about saving by paying yourself first, investing for the long-term and accumulating wealth for financial well-being.
    Every person has a set of financial beliefs, thoughts, habits and behaviors about money and personal finance. Even if they can’t express what their thoughts and mindset are, they still exist both consciously and subconsciously. Just by observing your own financial reality and outcomes, you can begin to better understand your financial mindset, behaviors and habits.
    Thus, it becomes important to develop and nurture a positive financial mindset. Since, it is difficult to develop the good financial habits and behaviors that will be necessary to lead to an improved financial outcome and overall financial well-being without a positive financial mindset.
  2. Write down your goals
    One of the first things you should ask yourself is what you want your money to accomplish. Financial goals will differ in the length of time needed to achieve them. Be sure every goal has a specific purpose, a dollar amount that it will cost, and a realistic target date. Make sure your goals are realistic and not set too high, or frustration may keep you from reaching them.
    – What are your short-term needs? Short-term goals are priorities that can be accomplished within two years.
    – Mid-term goals are priorities that can be accomplished within two to five years.
    – What are you saving for long term? What do you want to accomplish in the next 5 to 10 years? Long-term financial goals are priorities that may take more than five years to accomplish. Most long-term goals require investing.
    It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying, prioritizing and aligning your goals with your values, your goals will act as a motivator as you dig into your financial details.
  3. Create a net worth statement
    Achieving your goals requires understanding where you stand today. So start with what you have.
    – First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property.
    – Now make a list of all your debts: mortgage, credit cards, student loans—everything.
    – Next, subtract your liabilities from your assets and you have your net worth.
    If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  4. Know your cash flow
    Cash flow simply means money in (your income) and money out (your expenses). It will show you if you’re spending more or less than you earn.
    – How much money do you earn each month? Be sure to include all sources of income.
    – Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  5. Your budget and manage your expenses
    “A budget is telling your money where to go instead of wondering where it went.” John C. Maxwell
    For most people, financial success depend solely on how much they spend. This, it is important to find out where your money is going. Your budget will let you know how you’re spending.
    – Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes.
    – Then write down nonessentials—restaurants, entertainment, even clothes.
    Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on lines up with what is most important to you.
  6. Start (or build up) your emergency fund.
    Building a strong financial foundation starts with saving for emergencies. When you have a safety net for unexpected expenses, you don’t have to worry about throwing your budget out of whack. You can be confident that you’re ready for a car breakdown, home repairs, medical expenses or other emergencies that pop up. It’s OK to start small—saving $50 in an account you’ve designated for emergencies is a good starting point. You might work up to saving $1,000 and then eventually aim to save enough to cover three to six months’ worth of living expenses in an emergency fund. An emergency fund is essential because you need to absorb life’s surprises without making things worse. Without a stash of cash, you may have to take on debt for unexpected car troubles or surprise medical expenses. And, the fund can be kept in a savings account kept separate from your regular checking account. It’s not an account that should be dipped into often — unless there’s an emergency.
    If you already have an emergency fund, consider giving it a boost. An emergency fund should consist of three to six months’ worth of expenses, which is a different different amount for everyone. If you don’t think you’d survive financially if you missed a paycheck, then your an ideal candidate for needing an emergency fund.
  7. Focus on debt management
    Debt can derail you, but not all debt is bad. Yet, freedom from debt is an achievable goal for everyone.
    Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down. Do you know how much debt you currently have (credit cards, student loans, auto loans, mortgage, etc.) and how long it will take to pay off each debt at your current rate of payment? It’s important to make a long-term plan for debt repayment so you can focus your efforts on the most efficient ways to reduce your debt. This might include tackling high-interest rate debts first or loan consolidation. Create a running list of all your loan balances and interest rates so you can see where you stand today and identify ways to make a dent in your debt. For example, you might make extra payments on your loan with the highest interest rate. A financial advisor can help you review your debt and create a debt elimination plan. Use our Debt Roll-Down Calculator to find the best way to pay off your credit cards.
    If you’ve been struggling with old debt, such as credit cards, student loans or medical bills, now is the time to pay them off for good. If you’re not sure which debt to pay off first, consider the one with the highest interest. High-interest debt, like credit cards, can compound through hefty interest charges, late fees and other penalties. pay down the principal of your student loan. The sooner you pay it all off, the less burden you carry.
  8. Get your (retirement) savings and investing on track by paying yourself first
    Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference.
    Spending time today to plan your path to retirement can provide you peace of mind in the future. Getting started is the most important step you can take—it’s never too early or too late to save for retirement! The key is to continue saving consistently and make retirement savings a priority in your budget. Individual retirement accounts (IRAs) and employer-sponsored retirement plans, such as 401(k)s, offer tax benefits that can help your savings grow faster. As you near retirement, you’ll want to set a strategy for tapping retirement assets.
    Your financial plan should outline your retirement savings goals and ways to boost your savings (e.g., increasing your contributions every year or when you get a bonus or raise). Run the numbers using our Retirement Planner Calculator or review your retirement plans with a financial advisor.
    Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
    And, make the savings a priority by paying yourself first. This means that instead of saving what remains after paying your monthly expenses, individuals should pay themselves first by setting aside at least 10% to 15% of their monthly income as their first expense, and then pay the rest of their monthly expenses. Paying yourself means that your savings and other financial goals are taken care of before you allow yourself to spend money on less important items.
  9. College Savings.
    Parents and guardians face the challenge of balancing multiple financial demands, including your own retirement and future health care costs as well as education expenses for your dependents. Having a financial plan helps ensure you’re taking the right steps to address all areas of your financial life. Choosing the right college savings vehicle and planning ahead to take advantage of financial aid, loans and scholarships can help make college more affordable.
    Determine how much you want to save for college and the best way to grow your savings. Our College Savings Calculator can help you estimate how much you’ll need to save.
  10. Stay invested in the market for the long-term and check-in with your portfolio regularly.
    If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg.
    When was the last time you took a close look at your portfolio? There are no guarantees when it comes to investing, but it seems that fear and uncertainty tends to put investors on the sidelines when markets plunge and become highly volatile.
    Markets go up and go down down in the short-term which can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  11. Make sure you’re adequately insured
    Having adequate insurance is an important part of protecting your finances and family. Insurance is essential to protect your family and your financial future. Having health insurance, auto insurance and homeowners or renters insurance protects you when you need it. You may consider options for life and disability insurance, which can help protect your family’s finances if something happens to you. Review your insurance coverage and beneficiaries, especially if you’ve had any major changes in your family and life. A total risk assessment with an insurance professional can make sure you have the right level of coverage.
    We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage. You never know what the future may hold—but it helps to be prepared for anything. What if you or a loved one experienced major medical issues or needed assisted living or nursing home care? Making decisions about long-term care can be stressful and emotionally difficult, and the costs can drain your family’s finances.
    You may want to explore options for long-term care insurance to help pay for long-term care needs such as nursing home care. You may also decide to write an advance care directive regarding your wishes for medical care and name a power of attorney to make financial decisions on your behalf if you’re unable to do so.
  12. Know your income tax rate
    Taxes are one of the most insidious destroyers of wealth, along with debt. You should make sure you’re prepared for the annual tax season and review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information; take advantage of tax deferred accounts like IRAs and 401(k)s can help you save money on taxes and accumulate wealth more efficiently.
  13. Create or update your will and estate plan
    At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.
  14. Invest in yourself and continue to learn
    “An investment in knowledge pays the best interest.” Benjamin Franklin
    While college is a great self-investment, there are other ways you can invest in yourself. Consider taking courses in a field or industry you’re interested in pursuing.
    If you’ve been contemplating a career change, use your money to invest in that switch. If you need capital to start your own business, this could be your chance. Also consider using it to give yourself a much-needed break. Whether this is a vacation fund or simply money for a massage or spa day to recharge, reset and refocus. Focused on what would improve your well-being in the long-term, not a quick fix. Continuous learning and growth are the key.
  15. Three Pillars (financial wealth, physical health and emotional well-being)
    Financial assets like stocks, bonds and real estate are forms of personal wealth. However, Americans need to also focus their attention on staying emotionally and physically healthy. Self-care is paramount in all three facets of life which include financial wealth, physical health and emotional well-being. Eating a balanced diet, exercising, getting enough sleep and connecting regularly with family and friends, are essential to live a purposeful and fulfilling life.
  • Take control of your future with a financial plan for the next five, ten or more years.
  • Insurance Protection. Ensure you have adequate Medical insurance and consider purchasing Long-Term Care insurance.

References:

  1. https://www.brownleeglobal.com/financial-life-planning/?preview=true&frame-nonce=60592dd178
  2. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan?SM=uro#sf228155652
  3. https://www.cnet.com/personal-finance/how-to-invest-your-tax-refund/
  4. https://www.moneymanagement.org/credit-counseling/resources/financial-literacy-month

Financial Literacy and COVID-19 | Charles Schwab Foundation

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“89 percent of respondents to a Charles Schwab’s survey believe a lack of financial literacy contributes to larger social issues—from poverty, to fewer job opportunities, to wealth and gender inequality.” Carrie Schwab-Pomerantz

  • Even in the wake of a global health crisis, Americans value financial education.
  • An overwhelming majority of Americans believe that a lack of financial literacy contributes to larger social issues.
  • Americans want our schools to take the lead in providing our youth with a financial education.

The impact of financial illiteracy is not lost on the American public. 89% of Americans agree that lack of financial education contributes to some of the biggest social issues our country faces, including poverty (58%), lack of job opportunities (53%), unemployment (53%), and wealth inequality (52%).

“Financial illiteracy is insidious. The antidote is financial education, which gives people the skills they need to make smart money decision and can help improve their lives.” Carrie Schwab-Pomerantz, president of Charles Schwab Foundation.

Americans indicated they wish they had better money management skills, according to a Charles Schwab survey. When asked what they would teach their younger selves about personal finance based on what they know today, Americans said the value of saving money (59%), basic money management (52%), and how to set financial goals and work toward them (51%).

From the survey, it is apparent that every person in America should be taught the fundamentals of money management including budgeting, saving, avoiding debt, setting financial goals and investing.

“The pandemic has underscored just how critical basic personal finance skills are in preparing for the unexpected. Financial literacy is a survival skill that everyone needs.” Carrie Schwab-Pomerantz

Carrie Schwab-Pomerantz recommends five key steps every American can take to help shore up their finances during this period of global health crisis and economic uncertainty.

  • Start an emergency fund (or add more to it) to help protect yourself against an unexpected drop in income or expense shock. Set aside whatever you can – every little bit counts. Try to aim for $1,000-$2,000 to get started, and then work your way up to 3-6 month worth of essential expenses over time.
  • Create a budget to help you prioritize and assess your financial resources. Self-isolation has led to different spending patterns for many people, including cutting back on what we may have previously thought of as “essential.”
  • Create a financial plan to help you navigate from where you are to where you want to be. You don’t need to have a lot of money to need a financial plan. Consider it a roadmap to reach your financial goals, whether that’s to pay off debt, build savings, or make a large purchase.
  • Ask for help if you’re struggling. Given the scale of this economic crisis, the government, lenders and creditors are trying to work with borrowers through this difficult time. Don’t hide from creditors – that can make things worse.
  • Focus on what you can control. You can’t predict or control the market, but you can control how you manage your investments, your savings rate, having a financial plan and how you react to events.

“The need for financial literacy is especially urgent for women and minorities, who continue to face unique challenges at home and in the workplace,” said Schwab-Pomerantz.

However, financial literacy isn’t a cure-all, but it is an essential key to unlocking doors to opportunity and financial security.

References:

  1. https://www.schwab.com/resource-center/insights/content/americans-want-financial-literacy-now?SM=URO#sf237483690
  2. https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Financial-Literacy-Survey-Exposes-Grave-Impact-of-Lack-of-Financial-Education-During-COVID-19/default.aspx

Trading vs. Investing

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Trading and investing are two approaches to participating in the stock market. Each approach brings its own opportunities and risks

  • Investing involves buying an asset you expect will rise in value over the long term, with the goal of long-term gains.
  • Trading, on the other hand, is about timing market short term moves and buying and selling stocks within a short period for quick returns.

With trading, you’re hoping to earn quick returns based on short-term fluctuations in the market and stock price. Long-term investors, in contrast, tend to build diversified portfolios of assets and stay in them for the long term through the ups and downs (volatility) of the market.

Investing basics

Investing is geared towards managing and growing wealth in the market over a longer period of time like years or even decades. This means buying securities with a long-term outlook in mind and holding them through both market ups and downs until you reach your financial goal or are near the end of your investment time horizon.

Investing involves putting money into a financial asset (stocks, bonds, mutual or exchange-traded fund, etc). that you expect will rise in value over time. Investors generally have a long time horizon and predominantly look to build wealth through gradual appreciation and compound interest.

Diversification (owning a mix of investments) is important for investors as it can reduce their risk — mainly by mitigating the effects of volatility.

Trading basics

Trading is all about making frequent, short-term transactions with the goal of “beating the market,” or generating greater returns than you’d expect to receive by buying and holding over a longer time frame.

Trading involves buying and selling stocks or other securities in a short period of time with the goal of making quick profits. While investors typically measure their time horizon in years, traders think in terms of weeks, days, or even minutes.  

Two of the most common forms of trading are day trading and swing trading. Day traders buy and sell a security within the same trading day; positions are never held overnight. Swing traders, on the other hand, buy assets that they expect will rise in value over a matter of days or weeks.

Trading can be a risky endeavor for the uneducated and unskilled trader. If a trade goes against you, you can lose a lot of money in a short period of time. If you have a low risk tolerance and want to avoid volatility, investing will be the way to go. But if you’re more of a risk-taker and would like the chance to earn bigger returns, trading could be appealing.

https://twitter.com/jrdorkin/status/1332382094048202753?s=21

Takeaway

Although the terms — trading and investing — are often used interchangeably: trading focuses on short-term buying and selling, while investing involves buying and holding securities for an extended period of time.

If you’re comfortable with the risks, trading a portion of your money can be rewarding and could lead to higher returns. If reducing risk and volatility are your main goals, then you’ll want to stick with long-term investing to build wealth.

References:

  1. https://www.ally.com/do-it-right/amp/investing/trading-vs-investing/?__twitter_impression=true
  2. https://www.businessinsider.com/trading-vs-investing

Invest for the Long Term

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When the market is uncertain, following your long-term financial plan will be the best approach for growing your money and long-term investing success.

Like a roller coaster ride, keeping up with the constant change in the stock market can be an intense experience. And, although those periods of market uncertainty can be unsettling, the good news is that investors who stay the course and continue investing tend to do better over time. It can be tempting to sell at a loss when markets are low, and some wait too long on the sidelines and miss a window of opportunity. If you’re concerned about investing at the right time, you could dollar cost average your investments, which is investing smaller amounts at regular intervals, as opposed to investing a single lump sum at one time. By spreading out your payments, you can take advantage of market corrections and discounted pricing without having to try to figure out the optimal time.  The key is to stay calm and stick to your long-term plans.

Consider the Big Picture

Sometimes, we forget that what’s happening in the market today is really just a snapshot in time. History has shown that even after a slump, the market recovers. Even better, given the lower stock prices, a down market could be a good time to add to your portfolio. You’ll likely be in a good position to take advantage of future gains, especially if you don’t plan to cash out your investments for years.

Turn Off the Noise

Resist the urge to make investment decisions fueled by emotion or the day’s headlines. Stay focused on your goals and how long you have to achieve them. Here are some ideas to help you follow or tweak your plan calmly:

Assess your goals.

Consider how long you have to achieve your goals. What do you hope to accomplish in 5, 10, 20 years? How long do you have until retirement? If your goals need to be tweaked or you need to cash out some investments sooner than planned, be sure to talk to a financial advisor.

Review asset allocation.

Review how much you have in stocks, bonds, ETFs and cash. Is your portfolio still a good fit based on your age, goals and risk tolerance? If not, rebalance it to stay on target.

Start or continue to invest.

Investing your money is the most reliable way to create wealth over time.

If you’re new to the investing world, it’s time to get started and make your money work for you.  Your goal is to grow your money, and investing will yield higher returns than traditional savings options.

Continue contributing to your future.

Keep making regular contributions to your retirement plan. Prioritize these contributions as part of your monthly budget, so you’ll continue growing account balances without even thinking about it. And, keep in mind—participating in an employer-sponsored retirement plan or contributing to an IRA provides you certain tax and other advantages.

Investing may appearing daunting, especially if you’ve never invested in stocks, mutual funds or bonds before. However, if you figure out how you want to invest, why you want to invest, how much money you should invest, and your risk tolerance, you’ll be well positioned to make smart decisions with your money that will serve you well for decades to come.

Whether you prefer a do-it-yourself investor or prefer to seek assistance from an advisor, it’s important for you to develop good financial habits and for you to make sound choices.

References:

  1. https://www.fool.com/investing/how-to-invest/
  2. https://www.navyfederal.org/resources/articles/life/investments.php?cmpid=em%7Cnl%7Cresources%7Carticles%7Carticles%7Clife%7Cinvestments%7C11/20/2020%7C31689%7CA%7Ccb4.4